Parallels Between Today’s Market and the Dot-Com Bubble

Parallels Between Today’s Market and the Dot-Com Bubble

A recent article in The Wall Street Journal compares today’s stock market and the dot-com bubble by outlining five areas of strong similarity “along with one caution about applying the bubble label to the broader market.”

The five similarities are reported as follows:

  1. Exponential growth in the price of story stocks: “Anything connected to electric vehicles or clean energy has gone ballistic in the past few months,” the article reports, citing Tesla as the “most obvious example.”
  2. A flood of early-stage IPOS tapping into popular themes: Initial public offerings and special-purpose companies (SPACS) have been booming, “attracting celebrity backers and allowing companies without any revenue, let alone profit, to join the market.”
  3. New investors who don’t know what they’re doing: While the article stipulates that there are “plenty of smart and well-informed small investors,” it adds that in today’s market “stocks are again being swung about by the sort of amateur mistakes made by a beginner hoping to win big.” The same kind of mistakes made headlines during the dot-com bubble, it adds, “as droves of newcomers rushed to trade stocks based on message-board rumors.”
  4. Old-economy stocks soaring as they tap into the popular theme: In 1998 and 1999, the article notes, simply adding “.com’ to a company’s name led to gains averaging 74% in the next 10 days—today, companies are attempting to “sprinkle the magic dust of electric motors over themselves” to attract interest. The article cites the example of the Hong Kong-listed health division of one of China’s biggest property developers, “which changed its name to China Evergrande New Energy Vehicle Group” last number and saw its shares soar.
  5. Early investors who rode the stocks up selling out: Many early investors in renewable power or electric vehicles have “cashed in some or all of their gains to shift to other, cheaper areas offering growth,” the article reports, “even as they continue to believe in the underlying theme.” It suggests that perhaps the surging demand for IPOs and SPACs in anything related to batteries, solar and electric cars is approaching irrational levels.

But does this mean we’re in bubble territory? Maybe not, the article says, noting that the frothiness in today’s glamour stocks may not extend to the broader market because the low-rate environment established by the Fed “justifies higher prices for stocks with reliable long-term cash flows,” including big tech.

The article concludes, “Of course, investors might be wrong either about future cash flows (antitrust, people!) or about the outlook for bond yields. Either could lead to the stocks going down, perhaps by a lot. But falling because fundamentals changed isn’t the same as falling because a bubble burst, which typically leads prices to plummet further and faster.”